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Letter to the House and Senate Leadership on Federal Spending and Revenues.

December 17, 1969

WHEN GOVERNMENT spending gets out of hand, consumer prices go out of sight. To combat rising prices, I proposed last April to hold down Federal spending to $192.9 billion, cutting $4 billion from the programs proposed by the prior administration.

The integrity of the $192.9 billion budget total was seriously threatened in the summer by Congressional actions and by increases in uncontrollable payments such as interest on the public debt. To hold the line, I directed a further cut of $3 ½ billion in controllable budget outlays. Six out of seven dollars of this reduction was in Defense, a cut which was last week concurred in by the House of Representatives.

The Congress, in midsummer, also expressed its concern for overall fiscal responsibility, fixing a ceiling of $191.9 billion on total budget spending. This is one billion dollars less than my own target.

The Congressional limit, however, was a rubber ceiling. It provided--quite appropriately-an allowance for further increases in those uncontrollable payments, but it also---quite wrongly--removed the incentive for the Congress to exercise continued restraint by providing that increased spending later enacted by the Congress would be added to the ceiling and decreases taken away. The only significant decrease the Congress has considered thus far is the defense cut we had already made last summer. Every other major change has been up--more spending, which would have the effect of driving prices upward.

Furthermore, the legal allowance for uncontrollables was limited to $2 billion. But committed government payments in 1970 are likely to exhaust that $2 billion allowance and go an additional $2 billion beyond. Interest cost on the public debt has mounted by another $½ billion. In addition, quite apart from newly proposed Social Security benefit increases, existing Social Security, Medicare and similar benefit payments fixed by law will add another billion dollars to the April estimate. Still another $½ billion overrun is imminent, reflecting increased spending because of the loss of offsetting offshore oil receipts, and a potential shortfall in the sale of government financial assets, due to the persistence of high interest rates. In all, about six billion dollars in fixed, built-in increases have swelled government spending since we took office in January.

Therefore, both the Congressional ceiling and my own fiscal target are in jeopardy. The responsible path toward protecting the buying power of the consumer's dollar is clear. But the Congress has not appeared to be willing to take that path.

Congressional actions that have already passed at least one House could add about $4 billion to Federal spending this fiscal year. Such spending includes:

--Increased educational aid provided by the Labor-HEW appropriations bill.

--A premature civilian and military pay raise, following on the heels of substantial raises just this past summer.

--A 15 per cent increase in Social Security benefits in place of my 10 per cent recommendation, and effective months earlier.

--New legislation, worthy though it may be, to benefit veterans, children and others.

In addition, a billion dollars this year has been lost through Congressional inaction on Administration requests to make the postal system self-supporting and to permit sales of certain financial assets of the Farmers Home Administration and the Veterans Administration--actions which do not affect at all the benefits of these programs.

Taken together, this combination of action and inaction would load an additional five billion dollars onto an already overheated economy.

In spite of these actions that increase expenditures, recent Senate tax actions to increase personal income tax exemptions and retain part of the investment credit would, if approved, actually take $1.6 billion away from revenues.

The Congress appears to be well on its way to substituting tax reduction for tax reform. This will harm rather than help the average taxpayer. Sugar-coating a bitter pill is understandable, but all sugar coating and no pill will not help the patient. A tax cut for some citizens would mean a rise in prices for every citizen.

In a situation without parallel in our history, we came into the month of December, almost halfway through the fiscal year, with most of the regular appropriation bills yet to be passed. If the Administration is to achieve its goal of slowing down the rise in prices, it will have to reserve funds on many popular spending programs. The other course--of appealing to sundry interests--would run directly counter to the public interest.

A dollar of spending does not add just one dollar to the spending stream: It is spent, and in turn provides income to someone else to spend again, multiplying its effects. Every dollar released through reduced taxes or increased expenditures will produce several dollars of additional price pressures in the economy as those who receive the initial benefit in turn spend the money. A billion dollars of Federal spending or tax relief can add many times that amount to the escalation of our rising price levels. And inflation--the hole in everybody's pocket--is the most unfair tax of all.

If the American people do not believe that their government will maintain its commitment to a responsible fiscal policy, inflationary expectations will raise prices and interest rates further.

In a year that is already half gone, the Administration's ability to make expenditure cuts in the few areas where we have discretion is quite limited. Significant cuts would adversely affect the proper execution of ongoing government programs.

With the full loss of the surtax by July 1, revenues for the year beginning that day must be calculated from a base $8 ½ billion lower than the present base. At the same time, increases in uncontrollable Federal payments will raise next year's budget expenditures substantially-probably above $200 billion--quite apart from further Congressional spending actions or Administration initiatives to meet critical national challenges.

The achievement of a sound prosperity with steady economic growth demands restraint now. New Federal programs and increased benefit payments would be dissipated by ever-rising prices.

The Congress, along with the Executive Branch, carries the responsibility for the economic health of the nation.

This budget whipsaw--and the proposed increase in spending and reduction of revenues does whipsaw the consumer-comes at a particularly ironic time in the course of economic events. While restoring order in an economy racked by inflation for over five years requires the patience of Job, the fact is that some results have already been showing up:

--Retail sales have been relatively flat since midsummer.

--Business inventories have been piling up more rapidly, and this may require some further easing of production schedules.

--The consumer price index was rising at the rate of 6.4% per year in the first half of 1969, but the rate has dropped to 5.3% per year since June. This is tangible evidence that we are beginning to make some progress in relieving those excessive pressures on the economy that have been driving up the cost of living.

We are now, therefore, at a critical moment. If we persevere in strong, responsible fiscal policies, we can expect to see confidence building steadily in the year ahead--confidence that government really does intend to manage economic policies responsibly. The way we handle the Federal budget will determine whether millions of consumers can balance their family budget.

Unfortunately, reluctance by the Congress to come to grips with the need to hold down prices is recreating doubts about the will of government to persevere. An increase in personal exemptions or further large increases in Federal expenditures, let me repeat, do not make people better off in an economy already under pressure. They simply guarantee that price tags in the grocery stores, and the cost of living generally, will be higher.

These actions go a long way toward explaining why our financial markets find it hard to believe that Washington is capable of responsible budget policy.

Recently high quality bond issues could be marketed only at interest rates in excess of 9 per cent. It is difficult to develop a flourishing mortgage market when high grade corporate bond yields are at these levels. Why are bond rates so high? Contrary to what some believe, the primary reason is not Federal Reserve policy. Interest rates are high because savers and managers of money are insisting that nominal rates be high enough to give them a worthwhile rate of return after the inflation which they are assuming will continue.

We stand at the crossroads of credibility. If we can regain a fiscal grip on ourselves and carry through with a strong budget and fiscal policy, we can build on the growing evidence that policies of 1969 are beginning to exert a stabilizing effect. But if we miss this opportunity, it will be a long time before the public will ever believe that government can manage its finances in any way other than to produce sustained and serious inflation.

For this reason, I urge the Congress to join with the Executive Branch in a continuing display of determination to hold down spending and maintain revenue so as to contain the cost of living, no matter what the cost in political popularity. At stake is nothing less than the future of the American economy.

Sincerely,

RICHARD NIXON

Note: This is the text of identical letters sent to Senator Mike Mansfield of Montana, Senate Majority Leader; Senator Richard B. Russell of Georgia, President pro tempore of the Senate; Senator Hugh Scott of Pennsylvania, Minority Leader of the Senate; Representative Carl Albert of Oklahoma, House Majority Leader; Representative Gerald R. Ford of Michigan, House Minority Leader; and Representative John W. McCormack of Massachusetts, Speaker of the House.

Richard Nixon, Letter to the House and Senate Leadership on Federal Spending and Revenues. Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/240430

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